John D Milburn v. Minister of National Revenue, [1979] CTC 2007, [1979] DTC 24

Guy Tremblay:— This case was heard at Ottawa, Ontario, on December 7, 1978.

1. Point at Issue

The question here is to determine whether the appellant is entitled to deduct, for the 1975 taxation year, the sum of $4,900 paid as alimony to his wife in accordance with a written separation agreement that was not signed by the interested parties.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R 14/ S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 In February 1975, the appellant and his wife separated by mutual agreement.

3.02 In June 1975, counsel for appellant and counsel for his spouse drafted an agreement. The introduction of paragraph 7 of the agreement reads as follows:

7. MAINTENANCE—On the first day of June, 1975, and on the first day of each month following, during the joint lives of the husband and the wife, the husband shall pay to the wife:

(and follows the subparagraphs giving detailed financial obligations of the husband concerning his wife and his two children, the whole totalling $700).

3.03 Because of ongoing negotiations with respect to certain other aspects of this separation agreement, the separation agreement was not signed by the parties in 1975 but was signed by the wife on March 22, 1976, and by the appellant on February 6, 1976.

3.04 The appellant however always complied with the terms of this written, unsigned agreement; he paid $4,900 to his wife in 1975.

4. Act— Case Law—Comments

4.1 Act

The legislation authorizing the deduction of alimony paid by the spouse consists of paragraph 60(b) of the new Act, which reads as follows:

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) Alimony payments—an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

4.2 Case Law

The learned counsels for the parties cited the following cases:

1. MNR v Ghislaine Guèvremont, [1978] CTC 2949; 78 DTC 1678;

2. J V R Gagné v MNR, [1976] CTC 2163; 76 DTC 1125;

3. Thomas J Collins v MNR, [1976] CTC 2048; 76 DTC 1056;

4. William Edward Horkins v The Queen, [1976] CTC 52; 76 DTC 6043;

5. Julien André Pezet v MNR, [1974] CTC 2315; 74 DTC 1246;

6. John Reid v MNR, [1972] CTC 2661; 72 DTC 1540;

7. Edward D Arnold, Jr v MNR, [1972] CTC 2235; 72 DTC 1199;

8. George William Haigh v MNR, [1971] Tax ABC 434; 71 DTC 308;

9. Bennadict Vincent Griep v MNR, [1970] Tax ABC 1025; 70 DTC 1661;

10. Guy Chenail v MNR, [1968] Tax ABC 641; 68 DTC 498;

11. Dr Edouard D Gagnon v MNR, 41 Tax ABC 58; 66 DTC 319;

12. Edward Kostiner v MNR, 32 Tax ABC 124; 63 DTC 478;

13. Keith Norman Fryer v MNR, 31 Tax ABC 143; 63 DTC 176;

14. James B White, Jr v MNR, 29 Tax ABC 187; 62 DTC 271;

15. No 345 v MNR, 15 Tax ABC 236; 56 DTC 327;

16. Jim Wing Yuen v MNR, 14 Tax ABC 363; 56 DTC 116;

17. Eddie D Hardy v MNR, [1978] CTC 3120; 78 DTC 1802.

4.3 Comments

The Board is of the opinion that a verbal agreement becomes a written agreement only when it is signed by the parties.

If persons have participated in written but unsigned agreement and have complied with it, the document may serve to prove a verbal contract but that is all. Moreover, a verbal contract is not a written contract.

The following argument was pointed out in the present case: even if an agreement was signed only in February and March 1976, it was in fact retroactive to June 1975. The agreement must be considered as valid since June 1975.

In the Board’s opinion, the retroactivity to a former date stipulated in a written agreement generally means that the written agreement confirms the existence of a former verbal agreement which substantially contained the same conditions as those stipulated in the written agreement.

The contract involved in the present case is of that nature. The written agreement signed in 1976 confirms the verbal agreement of June 1975 but does not change retroactivity and the nature of the verbal agreement in the written agreement. The verbal agreement became a written agreement when the parties signed it in March 1976.

One of the reasons specified in paragraph 60(b) of the new Act to permit deduction of the allowances is that the agreement must be a written one.

The Board understands that, according to equity, it would be reasonable that the appellant deduct the allowance paid to his wife. Unfortunately, the Income Tax Act is not a law of equity. Since it is a public policy statute, it should be strictly interpreted, that is, according to the letter of the law.

Following that strict interpretation, sometimes there is equity and the principle equitas sequitur legem (equity follows the law) applies but not all the time.

4.4 The Board gives here the cases summarized in the Hardy case cited above:

In James Beatty, 13 Tax ABC 285; 55 DTC 444, the Chairman of the Tax Appeal Board disallowed the sums paid as alimony precisely because the appellant refused to sign the written agreement prepared by the lawyers.

In Keith Norman Fryerv MNR, 31 Tax ABC 143; 63 DTC 176, it was held that a letter written by the appellant did not constitute a written agreement signed by the two parties.

In No 345 v MNR, 15 Tax ABC 236; 56 DTC 327, it was held that an exchange of correspondence between the lawyers of the husband and wife to settle the sum of the alimony did not constitute a written agreement. According to the Court, the signatures of the husband and wife should appear on the document.

In Edward Kostiner v MNR, 32 Tax ABC 124; 63 DTC 478, it was held that correspondence between the husband and wife and between their lawyers did not constitute a valid written agreement.

In a recent judgment of February 13, 1978, the Tax Review Board (Ghislaine Guèvremont and Roméo Rivet v MNR), it was held that an agreement signed by the lawyer of the appellant’s spouse, to obtain judgment, but not authorized by her, could not constitute a valid written agreement within the meaning of 60(b).

Finally, the Court of Appeal of Quebec, District of Montreal, No 09-001401-769, in a recent judgment of March 13, 1978 (Albert Charlier v Deputy Minister of Revenue Quebec) affirming a judgment of the Provincial Court, refused to recognize as valid for 1971 a written agreement signed December 3, 1965 relative to 1966, stipulating a payment of $3,000 per year. This agreement provided for a method to be used by the parties in order to revise the amount of the alimony and to settle the amount each year on December 1 preceding each subsequent year. As there was no evidence given that this revision was made for 1971, the sum of $5,930 paid in 1971 was disallowed as a deduction in the husband’s income tax calculation. The Court also made the following comment:

While as a general rule, a tax statute should be interpreted in favour of the taxpayer in the event of ambiguity, the fact remains that when the wording of the Act is clear, it must be applied.

The Court of Appeal of Quebec, in making this judgment, relied on section 13 of the Provincial Income Tax Act (1964 RSQ c 69) which refers to paragraph 11(1 )(l) of the old federal Act. As we know paragraph 11(1)(l) of the old Act is similar to paragraph 60(b) of the new Act cited at length above.

Because of the interpretation which must be given to the legislation governing this case, the appeal cannot be allowed.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.